Color of money

A few weeks ago, I attended the two-day Unconvention 2011 – a social enterprise conference hosted by Villgro in Chennai. Nilima Achwal (Villgro Fellow) and I co-authored our conference report on the NextBillion blog – Villgro’s Unconvention 2011 – Key Takeaways. In social enterprise conferences, impact investing topics get a fair bit of air time and Unconvention was no different. In this post, I will be elaborating on this theme which we summarized in the Next Billion key takeaways post.

The SKS Microfinance-Sequoia alliance is oft touted as the poster child of a social enterprise attracting the wrong type of investor. If SKS hadn’t taken that Sequoia investment (and a series of progressively larger rounds from Khosla Ventures, Sandstone Capital, and Kismet Capital), the detractors’ logic goes, then SKS wouldn’t have been in such a tearing hurry to grow its loan portfolio, they wouldn’t have hit the public markets so soon, and wouldn’t have been aggressive with loan collections and so on. This Forbes article, At the crossroads, presents a vivid picture of SKS on the eve of their IPO.

At Unconvention, nobody explicitly mentioned SKS by name but the undercurrents of the SKS-Sequoia saga were palpable in all the impact investing discussions. Selco’s Harish Hande didn’t mince any words when he vociferously stated that it’s dangerous for investors to dictate what entrepreneurs should do. It was time, he said, for entrepreneurs to say “no” to certain types of investors. Hande admitted that he was fortunate in having the right kind of “patient capital” investors – the kind that didn’t need to talk to him for 10 years! He sounded dead serious when he announced his intention to write a book about the investors that have led to the failure of entrepreneurs. My friend and fellow social enterprise observer calls this the color of money problem. When you take money from a philanthropist vs. an angel investor vs. a traditional venture capitalist vs. an impact investor, the implications are different because each investor type is driving different outcomes. Money does have color after all.

While Hande’s voice was the most strident on this issue, panelists from the “Science & Art of raising capital” session had similar advice for social entrepreneurs. Anand Shrivastav, chairman and managing director of Beam Capital Management, urged entrepreneurs to do reference checks on venture capital firms (in a manner similar to VCs performing due diligence on entrepreneurs). “How the investor conducts himself on startup board of director meetings, whether the investor and investee have shared values – these are important considerations,” Shrivastav added. Another insight for entrepreneurs in raising capital was that an entrepreneur is the trustee of investor’s money – so take only as much money as you need, not what you can raise!

I’ll end the post by presenting a contrarian quote from the Internet’s original posterchild, Marc Andreessen, from his famous Nuclear winter of Web 2.0 blog post:

We raised the money to enable us to keep scaling given our accelerating growth (over 230,000 networks on Ning now, growing at over 1,000 per day) and to make sure we have plenty of firepower to survive the oncoming nuclear winter. At current growth rates, we don’t need it to get to cash flow positive, but having lived through the last crunch, it’s good to be conservative with these things.